Healthcare cost containment strategies shift: 3 proven ways hospitals can reduce costs

Healthcare cost containment — defined as the ability to reduce healthcare costs, ranging from labor costs to operational expenses to administrative waste — remains a top priority for healthcare leaders. In fact, the ability to maintain financial stability depends on a hospital’s ability to not only improve margins, but also cut excess expense.

Rising use and intensity of hospital services can boost revenue, but they also create significant challenges for healthcare cost containment. That’s because while higher patient volumes and increased use of higher-priced procedures may drive revenue growth, these same factors can hinder cost-reduction efforts by increasing variable expenses such as labor, specialized supplies and pharmaceuticals. 

In recent years, labor costs have put significant strain on hospitals and health systems. The American Hospital Association reports that workforce costs rose 5.6% in 2025 due to intense competition for staff, while labor expenses for hospitals increased 4.2% year-over-year as of February 2026.

Drug costs, too, have been high. In a recent statement before the Committee on Energy and Commerce Health Subcommittee examining opportunities to lower the costs of the U.S. prescription drug supply chain, the AHA noted that drug prices in the U.S. are among the highest in the world and continue to grow at an unsustainable pace. In 2025, 688 drugs, many used to treat chronic or severe illnesses, saw price increases that exceeded general inflation, with several more than doubling in cost. Adding to this concern are the cost increases associated with specialty drugs.

Understanding the most effective healthcare cost-containment strategies

The most effective healthcare cost containment strategies include:

• Optimizing labor and staffing models
• Improving supply chain management
• Increasing administrative efficiency through automation and AI

How hospitals reduce labor costs and improve staffing efficiency

Ways to mitigate high labor costs often include improving staffing models, reducing reliance on temporary agency staff and adjusting labor use to support greater productivity. Technology can often play a key role in these efforts. For example, AI and machine learning can be used for predictive staffing, where schedules can adjust proactively to decrease reliance on premium-pay, last-minute or temp staff.

In other instances, technology itself creates the means to improve staffing levels and boost productivity, as seen in the use of automated coding tools. At UMass Memorial Medical Center, for example, implementing an AI solution has made the coding staff more efficient, with automated systems assigning billing codes for simpler procedures and human staffers handling the more complex ones. The system’s approach has eliminated the need for overtime and reduced backlogs.

How supply chain optimization reduces healthcare costs

Another tactic to contain healthcare costs is improving supply chain management. Efforts will often focus on ways to better centralize purchasing, consolidate vendors, and reduce inventory waste. At the University of Wisconsin Health System in Madison, for example, leadership takes a multi-pronged approach to supply chain opportunities: The organization relies on enterprise-wide contracting processes that maximize volume and spend, collaborates with clinician champions to identify lower-cost alternatives and implements workflows that support supply-use standardization.

How AI and automation reduce administrative costs in healthcare

Administrative costs have outpaced patient care in recent years, creating a strong incentive to streamline processes and reduce waste. Many hospitals are seeking automation to improve the speed and efficiency of payment transactions, back-office functions, patient scheduling and services, and administrative clinical support.

AI in particular is redefining revenue cycle operations by identifying documentation gaps before submission, automating payer follow-up that would otherwise sit idle in work queues, and reducing the number of claims that escalate into appeals. All these efforts reduce the number of staff touches and associated costs per claim.

As organizations explore these and other improvement opportunities, they typically rely heavily on cost accounting to gain deeper insights into inefficiencies, waste and productivity gaps.

Measuring healthcare cost containment

Traditionally, hospitals and health systems have struggled to establish cost accounting systems that provide accurate cost data across the continuum of care. A step toward adopting industry standards is to use the L7 Cost Accounting Adoption Model, established by HFMA and Strata.

The L7 Model helps hospitals and healthcare delivery systems measure the adoption and utilization of advanced cost accounting methods, including time-driven and activity-based costing. The model provides an industry standard for helping hospitals and healthcare delivery systems:

• Assess their current cost accounting methodology, understand the level of accuracy of their cost data, and benchmark capabilities against peers, and
• Create a roadmap for the actions required to ensure their cost accounting approach meets their strategic needs

Each level of the L7 Model builds on the previous level, enabling an organization to improve the accuracy of cost accounting. As the provider progresses through levels, it can deploy more sophisticated costing processes and workflows, generating more meaningful and accurate output. The model also assesses current gaps in source system data to help standardize and automate data capture.

Building better teams for healthcare cost containment

Building teams highly skilled in managing cost data and translating data insights into strategy is another critical component of effective healthcare cost containment.

Multidisciplinary teams that include both clinical and administrative staff should analyze cost data collaboratively. Such an approach ensures that financial strategies do not compromise patient outcomes and that clinicians are equipped with the insights needed to identify inefficiencies and sources of waste.

In many organizations, finance staff are increasingly focused on improving their skill sets to better understand cost dynamics through data visualization, predictive analytics, and dynamic forecasting. One way to strengthen cost-containment competencies is through specialized training, such as attaining HFMA’s Certified Cost Report Specialist designation. Find out more.

Additional resources on cost containment

Further reading:

• Financial sustainability is biggest pain point for healthcare leaders
• Research on price caps fueling their spread
• How to achieve savings by reengineering nonclinical healthcare spending
• Employers seek strategies to control surging hospital costs
• Vitalic Health: Bold Conversations for a Healthier System

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